Prepared remarks
Good afternoon, welcome to the Ross Stores Second Quarter 26 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question and answer session. As a reminder, this conference is being recorded. Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward looking statements regarding expectations about future growth and financial results. Including sales and earnings forecast, new store openings, and other matters that are based on the company's current forecast of aspects of its future business. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and in the company's fiscal 2025 Form 10-Ks and fiscal 26 Form 10-Q and 8-Ks on file with the SEC. Now I would like to turn the call over to James G. Conroy, chief executive officer.
Thank you, and good afternoon, everyone. Joining me on our call today are Michael J. Hartshorn, Group President and Chief Operating Officer; Bill Sheehan, Executive Vice President and Chief Financial Officer; and Connie Kao, Senior Vice President, Investor Relations. Before discussing our results, I want to recognize the outstanding team across the company and throughout the country. The robust sales and earnings growth in the quarter are a direct result of your hard work and commitment to the Ross organization. Thank you. Now turning to our results. We are extremely pleased with the 10% comparable store sales growth we delivered in the second quarter, marking the second quarter in a row with double digit comp growth. Sales were strong in May, and improved sequentially each month with July delivering our strongest performance despite cycling a strong back-to-school performance last year. Customer traffic once again served as a primary driver of our comparable store sales increase which underscores the durability of our growth and the momentum we are building. We believe the increased traffic reflects the effectiveness of our customer acquisition efforts. During the quarter, we saw gains from new and lapsed customers along with more frequent trips and higher spending from existing customers, reflecting deeper engagement with both of our chains. Importantly, the new customers we are attracting span a broad range of income demographics and age cohorts, including younger shoppers, which we believe reflects the broad appeal of our brand and the success of our marketing efforts in reaching and engaging a diverse customer base. Once in our stores, both new and existing customers are responding to our compelling values and a broader selection of fashion and brands. Merchants and planners have done a terrific job of opening new vendors and satisfying the demands of a wide variety of customers. Finally, our stores organization has done an excellent job enhancing the in-store shopping experience and managing the elevated sales volumes. We feel great about the early success of our growth initiatives and have confidence in our ability to continue to gain market share. Consistent with the trends we saw in recent quarters, the strong performance at Ross was broad based across both merchandise categories and geographies. In the second quarter, home and cosmetics were our strongest businesses. By geography, we saw strength across all markets, with the Midwest performing the best. dd's DISCOUNTS also delivered solid sales and saw similar broad based performance across merchandise areas and geographic regions. Turning to inventory. Consolidated inventories at quarter end increased 18%. Packaway represented 36% of total inventory compared with 38% last year. We are leveraging our inventory position to not only meet the demand of higher customer traffic in our stores, but also to broaden our merchandise offerings on the selling floor across our store base. These efforts are leading to higher sales, and improved merchandise margins while maintaining fast inventory turns. We are pleased with both the level and composition of our inventory and continue to have plenty of flexibility to capitalize on closeout opportunities as we enter the fall season. Turning to store growth. We are now planning to open 115 locations in 2026, up from 110 in our prior guidance. We are particularly encouraged by the strength of our recent openings in both existing and newer markets giving us added confidence in our ability to continue to grow our store base over time. Our plans also contemplate approximately 5 to 10 store relocations and closures. Overall, we remain confident that the actions we are taking across merchandising, marketing, and stores are enhancing the customer experience and driving strong performance. While the results to date are encouraging, we believe we are only beginning to realize the full potential of many of our initiatives. Our sustained sales performance reinforces our confidence that our more growth-oriented approach is resonating with customers. The team is energized by the opportunities ahead and we see significant runway to build on the current momentum and drive continued sales gains over time. Now Bill will provide further details on our second quarter results and additional color on our outlook for the remainder of the year.
Thank you, Jim. Building on our success from the first quarter, we reported very strong sales and earnings results for the second quarter. Total sales for the period grew 13% to $6.3 billion with comparable store sales increasing 10%. As Jim mentioned earlier, the double digit comp growth was primarily driven by an increase in the number of transactions. Gross margin improved by 25 basis points, driven primarily by 405 basis points of tariff refunds. Merchandise margin increased by 110 basis points while distribution costs were lower by 100 basis points, given favorable timing of packaway-related expenses, higher productivity, and as we anniversaried last year's tariff-related processing costs. In addition, occupancy costs leveraged by 25 basis points. Partially offsetting these benefits were buying costs which deleveraged by 5 basis points from higher incentives, and an increase in freight costs of 10 basis points due to higher fuel prices. SG&A for the period deleveraged by 15 basis points due to higher incentives given the earnings outperformance. Second quarter operating margin increased 610 basis points, which included the aforementioned 405 basis points from tariff refunds. Excluding this benefit, operating margin increased 205 basis points compared to the prior year. Second quarter net income was $851 million compared to $558 million last year, and earnings per share were $2.66 compared to $1.56 in the prior year period. Sales for the first six months of 2026 grew 17% to $12.3 billion up from $10.5 billion in the prior year. Comparable store sales for the first half of 2026 were up 13% and earnings per share were $4.69 compared to $3.03 for the first half of 2025. As a reminder, both the second quarter and first six months results in 2026 include $253 million or approximately $0.60 in earnings per share of tariff refunds. Now to our shareholder return activity. As noted in today's release, we repurchased approximately 1.4 million shares during the quarter, for an aggregate total cost of $319 million under the 2-year $2.55 billion authorization approved by our board of directors in March of this year. We remain on track to buy back a total of $1.275 billion in stock during 2026. Now let's discuss our outlook for the remainder of 2026. As noted in today's press release, we exited the quarter with building momentum and we are excited about the plans we have in place as we enter the fall season. Despite facing significantly more challenging year-over-year comparisons in the back half of the year, we are raising our outlook for both the third and fourth quarters. Comparable store sales are now forecasted to increase 6% to 7% in the third quarter, with earnings per share expected to be in the range of $1.75 to $1.83 versus $1.58 last year. Our guidance assumptions for the third quarter of 2026 reflect total sales are forecast to increase 9% to 11% versus the prior year. If same-store sales perform in line with our forecast, operating margin for the third quarter is planned to be in the range of 11.7% to 12.0%, compared to 11.6% last year. Our forecast reflects leverage from the expected comp store sales increase as well as slightly higher merchandise margins, partially offsetting these benefits are higher freight costs given the increase in fuel prices. As mentioned earlier, we raised our new store opening plans for the year and now expect to open 51 stores during the third quarter, including 41 Ross and 10 dd's locations. Net interest income is estimated to be approximately $30 million. The tax rate is projected to be about 25% and diluted shares outstanding are expected to be approximately 319 million. Moving to the fourth quarter, comparable store sales are now expected to increase 4% to 5% on top of a robust 9% increase last year. Earnings per share are planned to be in the range of $2.17 to $2.26 compared to $2 for the same period in 2025. If the second half of 2026 performs in line with these projections, earnings per share for the full year are now forecast to be in the range of $8.61 to $8.77 versus $6.61 last year. Included in this year's forecast is approximately $0.60 of earnings per share from tariff refunds. Now I will turn the call back to Jim for closing comments.
Thank you, Bill. We delivered robust first half results and remain encouraged by the positive trends we are seeing across the business. While we are pleased with the progress we have made over the last several quarters, we remain focused on building on that momentum. The work underway across the organization is centered on continuing to strengthen our brand relevance, delivering world-class merchandise assortments, and further improving the in-store experience. We believe we have only begun to tap into the full growth potential of the business. At this point, we would like to open the call and respond to any questions that you may have.
Questions and answers
Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Matthew Boss with JPMorgan. Please state your question.
And congrats on a really great quarter.
Thanks, Matthew.
Thank you, Matthew.
So Jim, could you elaborate on the build in top line momentum that you saw across the second quarter and drivers of this exit rate strength? And just despite the tougher comparisons, you speak to the opportunity you see remaining in the back half of the year and beyond across the assortment, marketing and in-store execution?
Sure. Happy to. The quarter was really solid, and we are thrilled by not only the underlying growth number, the 10% comp, but the quality of the comp. It is really driven mostly by more transactions. Those transactions are driven by customer capture, both new and regaining lapsed customers. We are seeing existing customers shop more frequently. We are seeing all customers spend more. So from a customer KPI standpoint the metrics are just extremely solid. The merchandise KPIs are also solid. So we have seen broad based brands across all merchandise categories, in both chains, Ross and dd's. The geographic metrics are equally strong, so it is broad based strength across the country. As we went through the quarter, we had a little bit of—we felt the World Cup a little bit in June. We saw a really strong July, and if you recall on our last year call, we talked about July had a very nice acceleration from June. So putting a very strong July, you could surmise had to be more than 10% if it was the strongest month of the quarter, up against a very strong July last year. The exit velocity was very, very good. We got into August where we continue to be very encouraged by the current business and momentum that has been building. Last year, August was the strongest month of the quarter. So if we continue to believe that, we should not be concerned about cycling strong comps. On prior calls, we have talked about two schools of thought: can you comp the comp versus are you building momentum, and can the flywheel continue to grow the business. Hopefully, after the fourth quarter of really strong comps and laying out the next few quarters of what we believe is pretty solid guidance, we can extinguish that concern, because the underlying metrics that we see are just extremely positive across the board. If you come all the way back to some of the initiatives that we started last year, they are all still in their early innings. Some of them have been implemented across the chain, but some are only in some stores. Some of them have been implemented across all merchandise categories, and others are still waiting to be further implemented. And, of course, we have also launched new initiatives. So I cannot underscore enough that our outlook for the balance of the year continues to be extremely positive with a number of opportunities to continue the growth that we are seeing. Great color. Best of luck.
Thank you. Your next question comes from Lorraine Hutchinson with Bank of America. Please state your question.
Thanks. Good morning. Jim, you just did a 10% comp, and you are still talking about a lot of these initiatives being early stage. So can you talk a little bit about which of these initiatives you see having the most runway to continue to drive to this guided comp strength?
Sure. I will talk at a relatively high level. One of the things I have learned is my natural propensity to provide more detail just exposes us to other retailers picking up what we are doing and trying to emulate them quickly. But with some desire to provide some transparency, let's anchor back to merchandising, stores and marketing. And I could list probably a dozen initiatives on each of those. The merchant team has really done a great job of continuing to build great assortments, opening up new vendors and new brands, and starting to tell better merchandise stories across categories. The stores team has—if you go to a store you will see very well organized stores, inventory being recovered quickly, queue lines are shorter. So the stores team has really been able to rise to the challenge of a pretty sharp acceleration in sales over the last year or so. From a marketing standpoint, you can see what we are doing from a marketing standpoint. You can see our spots. You can follow us on social media. We are getting a tremendous amount of engagement with our new creative messaging. We have tweaked our media mix. But if I went through each of those points that I just made, and the other dozen or so points that I have not explicitly called out, there is no way you could believe that we have fully implemented all of them. So we sit and look at the business and just wake up every day with more ideas that continue to drive more growth. That was really helpful. Thank you of course.
Thank you. Your next question comes from Corey Tarlowe with Jefferies. Please state your question.
Great. Jim, the comp momentum continues to be very impressive, and a lot of the work that you have done around marketing continues to show really strong momentum there. I am just curious how you think about how the marketing is fueling new customer acquisition and whether or not these newer customers that you are acquiring are higher income in nature, and the types of products that these customers are purchasing as well relative to some of the products that you had in your prior assortments. Thanks.
Sure. The marketing team, both the creative team and the analytics team and the folks that are buying our media, I think, are doing a tremendous job, and we are still learning. We still think there is some more opportunity for us to improve. We have absolutely seen brand new customers come into Ross and dd's that had not shopped with us in the past, as well as recapturing customers that perhaps used to shop with us and are returning. In terms of what the new cohort of customers looks like, I could not describe a better report card, if I am honest. The quick answer is our new customer profile as a group looks very similar to the composition of our current customers, which would imply that we are seeing growth across every single household income group that we track, every single age group that we track, and every single ethnicity. So it has been just a broad-based increase in customer capture across all dimensions, which is handy because that means that the proposition that we have in the stores that we already know works for our current customer will work for a new cohort of customers. Does that answer your question? Yes. It is very helpful. Thanks so much, and best of luck.
Thank you. Your next question comes from Chuck Grom with Gordon Haskett. Please state your question.
Hey, thanks a lot. Jim, could you talk about your success over the past year and how it has translated into a stronger vendor flywheel, both in terms of new suppliers entering the mix, but also deeper relationships with existing vendors. And then my follow-up question is just on the lapsed customer opportunity. I do not think you brought that up in past. Can you maybe just size that up for us? Thank you.
Sure. Having only been here for a little over 18 months now, I continue to marvel at the strength and partnership that we have with the vendor community. They are true partners and they are the lifeblood of our growth. The team, and this absolutely predates me, the team under Karen in each of the divisions aim to be genuine partners and easy to work with for our vendors, and I hear that all the time. The partnership with our current vendors and bringing on new vendors ties to a few things that are happening within the business. Number one, just our growth. We are continuing to post nice growth. I think any vendor appreciates that, and a rising tide lifts all boats. The second piece is some vendors that perhaps had been resistant to sell to off-price or specifically to Ross in the past, now go to the stores and see that their product will be showcased and merchandised in a neat and tidy way, and the stores team has done work in enhancing the shopping experience which has probably further helped the relationship with our vendors because they know the product will be treated with great care. Finally, I hear from our vendors that they see the change in the brand positioning, they believe it is a fun and exciting brand now, and they want to participate. So when you put all those three things together, I think the partnership with our existing vendors continues to be quite strong, and the merchants' persistence in opening up more and more brands has continued to become more successful. I am not convinced I answered both of your questions. Did I cover everything? You definitely answered the first one. I was curious. You talked about a lot of the traffic being from new customers, but also from lapsed customers. So I was wondering if there was a way to size up that opportunity and maybe how the team is going after those lapsed customers more aggressively. Sure. Let me just give you a little insight as to how we get that information. We use a third party credit card vendor. It is widely available on the market. So we can see credit card numbers that have not been in the store for a period of time and then when they return. That is how we are measuring it. It is somewhat of a new muscle. We are strategically prospecting for them from a marketing standpoint and how we are spending our money, and now we have an ability to measure it based on that credit card data, albeit it might be a little rough; it is certainly directional. The goal, of course, is to show them a world-class merchandise assortment once they get in the store, have them have a great experience and encourage them to come back and come back more frequently, and we are seeing that as well. Understood. Thank you.
Your next question comes from Paul Lejuez with Citigroup. Please state your question.
Jim, I am curious if there is any way you can quantify for us the number of new customers that you are seeing on a year-over-year basis? How does it look in 2Q sales coming from new customers versus what you saw in 1Q? And kind of the same question on the vendor side. Any way to frame the number of vendors you are currently working with today versus, let's say, a year ago? How would you characterize the new vendors? Is there a common thread? And what is ultimately the right number of vendors to be working with? Thanks.
Sure. On the vendor question, there are times when we invite in a stronger national brand into the store, and when they come in, sometimes it is a net new add, but there are also occasions where they take space from a vendor that perhaps is more tertiary. So the vendor count alone does not fully capture the change. If you walk the store and look at the vendor brand plates that are in the store, you will start to get a sense for not necessarily always higher price point vendors, but the strength of the brands that we are carrying now which is an extension of the brand strategy that started a few years ago. In terms of quantifying customer capture it would be hard to provide that much data and it is a little proprietary. But if you parse out some of the things we have said, attend comp was mostly transactions; a smaller portion was an increase in basket. Of those transactions, it was a combination of brand new customers, returning customers who used to shop with us, and existing customers shopping more frequently. I would not say it is a third, a third, a third necessarily, but think of it in those three buckets—each of them meaningful in their own right. So it is new customers coming in, recapturing lapsed customers, and getting current customers to shop more frequently, and we think we can continue to find opportunities to do more of all of that. Got it. Thank you. Good luck.
Your next question comes from Michael Binetti with Evercore ISI. Please state your question.
Hey, guys. Let me add my congrats on a nice quarter. I will ask one, and then if it is okay, I will ask a follow-up after. But you have talked a lot about better vendor acceptance, stronger merchandise availability. As the sales and the store experience have improved, has that changed the quality of what each of these vendors is willing to offer you? Are you getting more access to the better and best side of the assortments? And more importantly, is buying in those higher tier categories from these vendors more competitive with other off-pricers than what you have seen in the past?
I did not quite follow the second of your question.
The first part is, are we getting more vendors and even higher-end or better quality product? What was the second part of your question? Or is it as you get access to the better and best of the assortments, are the buyers finding those higher tier categories of these vendors more competitive with other off-pricers? I see. I think the answer to the first part of your question is yes, we are getting more access to better brands—more popular brands, not necessarily higher price point brands. And in terms of are they more competitive, I think all of the off-pricers—and one of them has already reported—opportunities from a supply side standpoint, from a closeout standpoint, are outstanding. There is plenty of product to continue to fuel the fire, and I think we have always been competing to some degree for that next buy and we have some formidable competition out there. We are helped a little bit right now because of our outsized growth. Occasionally, we get the ability to open up vendors because we are growing more or one of our competitors may not want more product or need more product. So there are a number of factors and we still have plenty of work to be done to continue to knock on doors and be persistent with brands that we would like to bring into the store. I am calling vendors from time to time to try to open them up if I can help.
And then if I could ask a follow-up: As you think beyond this year, which has been remarkable, do you believe this business ultimately settles back into what we think of as a traditional off-price 3% to 4% algorithm on same-store sales? Or do the ongoing pilot and implementation of the initiatives that you talk about in marketing, merchandising, customer acquisition support comp potential above that for another year? What would mean to continue working for the latter to be true?
Michael, it is Michael Hartshorn. Hi, Michael, how are you? We are clearly pleased with the current performance and trend and as Jim said multiple times, many of the things that we are testing in store, testing in merchandising, and testing in marketing are at very early stages. So we think we can certainly grow beyond where we are trending today and be able to comp on top of the very strong comps this year. I think from a question of whether it is time to update the long-term algorithm, the right time to do that would be further along in some of the initiatives we have in place. At this point, we would not update the long-term year-over-year algorithm and hope to beat that long-term algorithm in the short term.
Your next question comes from Alexandra Straton with Morgan Stanley. Please state your question.
Perfect. Thanks so much. Maybe Jim, as you look forward, do those initiatives you have spoken to require a structurally higher level of investment to sustain that high comp growth? Or do you believe most of the investment is already reflected in the current cost structure? And I just have one follow-up.
This is Michael again. The investments are largely within the cost structure, and you can see it in the results in the P&L and the capital structure. Clearly, we have expanded our unit growth which takes additional investment, but that is the best investment we can make in the company. Usually, that capital pays back in a matter of two to three years. For the initiatives, the biggest impact you can have is across 2,300 stores. We have very good test and learn capabilities so the investments we are making are first tested in pilot stores and if it makes sense, we expand. If it is a capital investment, it will make sense through the P&L. Despite the initiatives we have put in place, we have been able to leverage store payroll this year and leverage SG&A as a whole. We will continue to test and if it works on the total P&L, we will make the investment, and we have been happy with how we have been able to manage putting these new initiatives in place and managing our capital and expenses.
Great. I will leave it there. Thanks.
Your next question comes from Brooke Roach with Goldman Sachs. Please state your question.
Had a follow-up on Alexandra's question, which is that given the success of each of these growth initiatives, are there any areas where you think you should lean in and increase the pace of these investments, whether it is marketing or otherwise? Maybe said another way, is there a change in your thinking about the typical level of flow-through that we should see per point of comp outperformance versus your guide?
Maybe I can start that one and Michael or Bill could add if necessary. We have not asked that question in a broad way—should we be doing even more? Could we drive even more growth? We are pretty pleased with the underlying growth that we have right now, and demand generation has not been a huge challenge for us. With all of these things working together, one of the questions is what about our flow-through? Are we going to meet those expectations? The answer for the last four or five quarters has been yes. So for the time being, we are going to continue to work largely within the economic model we had with the flow-through assumptions that are out there. I would signal that if there was a point in the future where we thought we were going to overinvest betting on future long-term value, we would bring that to the market before we did it and not surprise you at the end of the quarter. So right now, with the exception of some small things here or there that have been subsumed in the growth we are seeing, we are working within the financial construct of the business that has been in place for years now.
So, Brooke, that same 10 to 15 basis points per 1% of comp model still holds.
And your next question comes from Mark Altschwager with Baird. Please state your question.
Thank you. Good afternoon. Maybe first question, just following up on margin. I guess if my math is correct, the implied raise in the back half is a bit more than that 10 to 15 basis points. If we look at how much the earnings went up relative to the comp raise. I guess, is that right? And maybe what are the other factors affecting the flow-through assumptions in the back half? Aside from better leverage on higher sales, has anything changed in terms of your view on the margin puts and takes for the back half? Thank you.
I think the back half we are in line with the comp raise that we have there on the 6 to 7 and the 4 to 5 comp raise. We are seeing that top-line momentum and we feel good about what is in place. Our guidance reflects some of what we have talked about there: higher merchandise margins and some lower DC costs. So it is in line.
And then maybe a bigger picture on the competitive backdrop. A number of the large national chains are leaning harder into price investment this year and the back half of this year, reinvesting some of the tariff refunds. Given the acceleration through the quarter that you cited and the August trend, it does not seem like that is having an impact. But how are you thinking about protecting the value gap in this environment and what are your assumptions for ticket growth in the back half and how that might change as you maintain your competitive pricing?
Sure. Starting with the overarching premise that we always want to have that pricing umbrella under mainstream retail. One of the things we did last year was be hesitant to pass through AUR increases; we called out some impact to our earnings when tariffs first came to bear. A lot of other retailers took a different position in trying to pass that along and maybe now are reversing course. We have tried to maintain a little more stability and in today's inflationary environment we absolutely want to have the best values in our store. If we were to see something where we did not have that price umbrella, we would make a change, but I think we are safe where we are now. For the back half of the year, you will likely see some very modest AUR increases at the same sort of levels we are seeing now—low single digit. We really want to be there for a customer battling higher gas prices and other inflation pressures. It is an important strategic question, and I like the consistency of our pricing strategy right now. If we were to do some competitive price shopping, we would look very competitive.
Your next question comes from Ike Boruchow with Wells Fargo. Please state your question.
Hey, let me add my congrats. I was wondering if we could dig into the back half margins. Just curious if you can maybe let us know what is going on in the gross margin within your plan for the third quarter and the fourth quarter? Specifically, I know you called out freight as a 10 basis point headwind in the second quarter. Does that worsen in the back half? What have you seen with contracts since the last time we heard from you? Just curious how to think about the freight line within that.
Certainly, you heard specifics on Q3. We will provide more specifics on Q4 when we report Q3 results, but we do anticipate merchandise margin will remain a tailwind and some benefit in DC costs. Similar to Q3, we are projecting domestic freight to deleverage due to higher fuel costs. As you can surmise, the raised sales guidance in Q4 would imply some EBIT margin improvement versus last year. We do not hedge fuel costs. The biggest component of our freight is fuel, so if fuel changes materially from where it is today, that would have an impact, but we have embedded higher fuel in our guidance right now.
Is that impact more detrimental in the third quarter and fourth quarter than it was in the second quarter? I think it depends on what happens with fuel prices.
Okay. We have our best estimate from where they are now, but again, it kind of depends on where it goes from here.
Your next question comes from Jay Sole with UBS. Please state your question.
Great. Thank you so much. Jim, I am curious about trying to understand the comp channel a little bit better because it sounds like transactions was a big driver, which presumably means traffic. But a lot of the key initiatives, like getting better brands and holding more inventory in-store, those are not really traffic drivers. Whereas marketing, which would be a traffic driver, or better in-store execution, could drive transactions. But those sound secondary. Are we missing the point that maybe marketing is a bigger driver of traffic and some of the merchandise initiatives have yet to really show results and maybe that is why you see only the beginning of the improvement at Ross, and why it could continue longer term?
Great question. All three pieces work together. The part we do not have great ability to parse out is if we see an increase in transactions, there are times when it is a customer who was going to shop anyway but now the assortment is great or the store looks better and they get converted, and we cannot always connect that last piece because we do not have traffic counters. If you think about what is driving traffic, marketing plays a key role—great creative, right media mix, and capturing a whole cadre of customers: new customers, returning customers, and encouraging existing customers to come back more. There is also a thesis that an existing customer may shop more frequently because the assortment is improved and the store experience is better. We cannot fully attribute that solely to marketing. We try to split it into three buckets: marketing drives sales top of funnel, and assortment and store experience convert that traffic into buyers. But it is not that clearly delineated. We are challenging marketing to continue to fill the top of the funnel, merchants to bring the best assortments, and the store experience has absolutely improved. All of them work together and we call it a flywheel or a virtuous cycle and we will continue to roll that forward. That is helpful.
Let me ask one more if that is okay. Just trying to understand brand relevance. How much is improving brand relevance tied to getting better brands in the store? Is it about getting more consumers or higher-income consumers, but also about telling Ross to vendors who will give you the products you want?
We want Ross and dd's to both resonate with consumers in their own right as brands and the underlying proposition of both is a strong value orientation. We do not want to lose that. We think we can be more than that. You can see it in our Instagram posts where we swing from product and value stories to storytelling and creative stretches. That is intentional and it seems to be working.
And your next question comes from Dana Telsey with Telsey Advisory Group. Please state your question.
Everyone, congratulations. As you think about the categories that you called out, Jim, cosmetics and home being strong drivers, last quarter I think it was ladies and cosmetics. Cosmetics has been consistent. Any update on apparel or on ladies and how that performed? And then the uptick in the new store openings, any in the Northeast, or where do you see them going? Where do you see them opening? Is the size at all different? And does the acceleration this year in new store openings suggest that we could see an accelerated pace of new store openings going forward in future years? Thank you.
I will start and Michael will address real estate. On category growth: cosmetics was strong—credit to the team who have done a really nice job quarter after quarter. The home business was very strong this quarter; it was growing slightly less than company average in prior periods and is now outpacing company average with particular strength in decorative home and housewares, with mid-teens growth. From a ladies perspective, the ladies business continues to be very strong; it was comp-enhancing in Q1 and in Q2 it is slightly below company average but pretty much in line. We have seen nice growth in the younger parts of that business, particularly juniors. Overall it is encouraging to see every major merchandise category comping positive.
Dana, on real estate, the team has done an outstanding job growing our pipeline. The intent is to grow so that we have year-over-year unit growth around 5% which is in our model. This year we had a few stores that were teetering between opening this year or next, and the team moved them into this year. We are excited about growth in the Northeast and the overall new store performance this year. Store size has not really changed; sometimes we take on more real estate and sometimes less on a side-by-side basis, but we are excited about expansion opportunities.
Your next question comes from Adrienne Yee with Barclays. Please state your question.
Great. Thank you very much. Are you seeing any shift in the inventory availability from closeouts at retail versus wholesale partners and vendors? And secondarily, any categories where you think you are underpenetrated and could be more competitive?
No meaningful shifts on the first part. Closeout opportunities are very strong. We do see categories where we think we can grow and are underpenetrated relative to where we should be or relative to some off-price competitors, and we press for more growth there. I would rather not divulge specifics, but we look at our percentage of business by category and compare to others. In terms of competing for goods, availability is strong; as you see some softness in mainstream retail there is a lot of goods becoming available and we expect that to continue so we will get our fair share. Off-price at the end of the day will probably continue to be a winning sector and we hope to lead that sector.
And then a quick follow-up on AI: as agentic search directs consumers, how do you think that impacts off-price over time?
AI is everywhere and it will be important. Michael and the IT team have invested in foundational data elements needed to integrate AI. As we go function by function we will enhance processes with AI—analytics, planning and allocation—and our software developers are using it daily. We prefer to integrate AI within how we operate rather than creating a separate functional area. It will be an enhancer to operations. I am personally very bullish on AI, but we also see tremendous opportunity to execute on basic blocking and tackling: improve customer experience, assortment, and drive sales growth, with AI as icing on the cake.
Thank you. Our next question comes from Krisztina Katai with Deutsche Bank. Please state your question.
Hi. Good afternoon, and congratulations on a really excellent quarter. You described the new customer cohort as having an exceptionally strong report card. Can you talk about the metrics that have exceeded your expectations the most? And when you said initiatives are in the early innings and some implemented chain wide, some in certain stores, what percentage of stores are currently operating under this new playbook? Could you frame that up in terms of opportunity?
I will clarify both points. On the first, the customer performance indicators are extremely strong across multiple dimensions: we are seeing customer capture from brand new customers, returning customers who had been away for a period, increased frequency from existing shoppers, and increased basket/average spend. All these metrics are checked. The new customers look very similar to our current customers in age, income and ethnicity—like a mirror image. On the initiatives, think of them in three buckets: merchandising, stores and marketing—and many other functions like HR and supply chain. Some initiatives are rolled out chain-wide; others are piloted in a subset of stores to learn and then expanded if successful. It is hard to say a single percentage of stores have the full 'new playbook' because every store is different in size and location. It is a series of things ramping up over time with our test-and-learn capability used to expand successful programs.
Your next question comes from Aneesha Sherman with Bernstein. Please state your question.
Thank you. I want to ask about your strategy of increasing in-store inventories. We are seeing signs of a weaker U.S. consumer across the board. How do you think about the risk to a higher inventory strategy if we see some softening in the consumer trend and perhaps a slowdown in turns? And when you say new customers are similar to current ones, do you believe there is some share shift within off-price or are these new customers entering off-price from mainstream retail?
On inventory, we did carry higher store-level inventory during the quarter partly to support stronger consumer demand. Despite that, our in-store turns remained very strong, and we delivered higher merchandise margins while clearance levels remained historically low. The key is maintaining flexibility in open-to-buy so we can take advantage of closeouts in the marketplace or adjust inventory levels if there is a pullback.
I agree with Michael. I do not ascribe real risk to our inventory position right now. Regarding share shift within off-price: mathematically over the last four quarters we have grown stronger than each of the other two major players, so we have captured more share because we have outgrown them. I cannot comment specifically whether we are impacting either of the other two players uniquely—both are formidable and world-class. We are competing with them and capturing share from many places in retail. We want off-price to win and we want to be a bigger winner within that sector.
Your next question comes from Marni Shapiro with Retail Tracker. Please state your question.
Hey, guys. Right in under the wire, and congratulations. I've been very impressed with your Instagram; it's fun and young. Do you have data showing that it is driving younger consumers? And are you going to increase marketing spend in the back half and into 2027?
We are constantly analyzing data and have strong indication that our marketing efforts, both creative and media mix, are driving traffic including younger customers. It is a bridge built over time rather than a single post driving immediate traffic. Regarding marketing spend, as our business grows we plan marketing as a rate of sales so we will see some increased spend in the back half. In terms of rate, we might see some slight escalation but we'll monitor how it goes.
Great. One follow-up: you mentioned FIFA and back-to-school. Are you leaning more into holidays and events like Halloween, Valentine's Day, graduation, Mother's Day? It seems shoppers respond during these times across income levels.
Event-driven in-store selling has existed for a couple of years and we have done a good job; we continue to hone that ability. I would not call it a sharp change in strategy, more a doubling down on events. Interestingly, weekly comps through July were very consistent; we are not seeing massive week-to-week swings tied to events, so the year-over-year comp has been fairly steady. Stable and consistent performance is constructive.
And our final question for the day comes from Bob Drbul with BTIG. Please state your question.
Hi. Thanks for taking the question. I have two. First, when you think about the new vendor adds and what is happening in the business, is your mix of good, better, best shifting dramatically over historical years of the company? Second, I'd love to hear your take on the dd's business, where you feel that is and the opportunity, especially as it relates to performance at the Ross division.
On price points—good, better, best—we are not seeing a massive shift. We are deliberately trying to maintain the good price point because that is our bread and butter. It would be foolhardy to elevate price points meaningfully in the current environment. On dd's, the business is in a great spot. dd's tucks in beneath Ross price points. They had a very strong quarter as well—on a one-year basis not quite as strong as Ross, but on a two-year basis almost exactly in line. Karen and Kim lead that business and are doing a really good job. We pursue new and better national brands across price points; sometimes they shade higher, but we are being careful not to overshoot our customer in the current environment. Great. Thank you.
Thank you. I will now hand it over to Jim Conroy for closing remarks.
Very good. Well, thank you, everyone, for joining us today. We look forward to speaking with you on our next earnings call. Take care.
Thank you. And this concludes today's conference. All parties may disconnect. Have a good day.